Universal life insurance offers lifelong coverage, but the death benefit and premiums are both flexible. You can reduce your premiums by lowering your death benefit or requesting a death benefit increase by paying more in premiums and potentially taking a new medical exam.
These policies also come with a cash value growth component, which receives a part of each premium and grows tax-deferred at a guaranteed rate. You can borrow or withdraw from it when it’s large enough, or receive the cash value if you surrender the policy, minus surrender charges.
These are helpful features for some, but not all. Fortunately, there are plenty of alternatives to universal life insurance to meet a range of prospective policyholder needs. This article will dive into three universal life insurance alternatives and offer a few tips on picking the right policy type for you.
1. Term life insurance
Term life insurance lasts for 10 to 30 years, depending on your choice. That means you must renew coverage when it expires. Additionally, this temporary policy has no cash value growth component.
However, premiums are more affordable to account for the risk of outliving the policy. According to LIMRA’s 2022 Life Insurance Barometer study, the average annual cost for a 20-year, $250,000 term life insurance policy for a 30-year-old in good health is only $170 per year. This can make term life insurance an excellent option if you don’t need a savings -building vehicle and want to get the most coverage for your dollar.
2. Whole life insurance
Whole life insurance is similar to universal life policies in that it lasts for life and comes with a cash value growth component that grows tax-deferred at a fixed interest rate. However, keep in mind that the premiums and death benefit never change.
Whole life insurance also tends to cost more. According to Forbes, whole life insurance policies can cost almost twice as much as universal life insurance policies. Still, these higher premiums may be worth it if you’re looking for the increased stability and predictability of a whole life insurance policy.
3. Final expense insurance
Final expense life insurance is a small permanent life policy with a small death benefit and low premiums. This type of policy comes with a cash value growth component and typically doesn’t require a medical exam.
Final expense insurance is designed to help loved ones cover final expenses, like medical bills and your funeral. It can be a helpful tool if your loved ones won’t need help replacing your income but need money for end-of-life costs.
How to choose the right policy type
Now that we’ve reviewed several alternatives to universal life insurance, you may be wondering, “What type of life insurance should I get?” Here are a few factors to consider that can help you choose the right policy type:
How much coverage you need
It’s generally recommended to get a death benefit equal to at least 10 times your annual salary. For example, if you earn $50,000 per year, you may consider getting a $500,000 death benefit. If you have a large family or more debts and expenses, you may want to get a higher death benefit. On the other hand, if you and your partner both work full-time and have no children, you might be able to get less coverage.
How long you need coverage
Some people only need coverage for a fixed period of time. If that’s the case for you, then term life insurance might work best, since it costs less but doesn’t last forever. If you choose term life insurance, you’d have to consider how long you need coverage . On the other hand, if you need lifelong coverage, a permanent life insurance policy like whole or final expense insurance might be a better option.
Your wealth-building needs
Term life insurance can work well if you don’t have complex financial needs. For example, you may only want to save for retirement through a workplace plan and an Individual Retirement Account.
On the other hand, you may have a more complicated situation, such as multiple income streams and various assets. In this case, a permanent life insurance policy like whole life or final expense insurance can offer wealth-building opportunities through the cash value growth component.
The bottom line
Universal life insurance is an excellent choice for some policyholders, but not all. In that case, there are plenty of alternatives. Term life insurance can be a great choice if you want maximum coverage for your dollar and don’t need another investment vehicle. If you want lifelong coverage and guaranteed cash value growth and are willing to pay more, whole life insurance can be a viable option. And finally, final expense insurance can offer enough to cover end-of-life costs and a cash value component.
Regardless of the policy you choose, shop with multiple insurers to gather quotes and compare them. Doing so will help you lock in the best rates on the policy type and coverage you need.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.
